Question

the relationship between infant industry and market failure

Answer 1

an infant industry is defined as the new industry which is in the early stages of development, and not yet capable of competing against established industry competitors.

infant-industry theory justifies protectionist trade policy. Since young, emerging industries need protection from more established, substantial industries elsewhere.

Infant industries don't have the economies of scale that older competitors in other countries may have, and should be protected, just until they have built an economy of similar scale.

So as protectionist measues , government follow import duties, tariffs, quotas and exchange rate controls to prevent international competitors from matching or beating the prices of an infant industry, hence giving the infant industry time to develop and stabilize.

Then once the emerging industry is stable enough to compete internationally, any protective measures introduced, such as tariffs, should be removed.

So if the government could offer a finite period of protection from international competition, the national industry could become profitable.

Main requirements:
1)The candidate industry is a positive net present value industry

2) The normal operation of the market will not support the establishment of the industry (market failure);
3) A limited period of policy intervention will create conditions conducive to the industry’s establishment.
Thus to follow the protectionist policy for infant industry, the comeptitive forces of demand & supply do not determine the functioning of the industry, rather market failure exist in form of positive externality as the socially efficient output level is higher than determined by the Competitive market.